UBS Capital Demands Could Be Phased In, Swiss Regulator Says

(Bloomberg) — Switzerland’s financial regulator said that it would be open to introducing higher capital requirements for UBS Group AG in stages over a number of years, potentially pushing back the impact of changes the bank has fought stiffly against.

It’s “better to have the right answer with the necessary phase-in, than the wrong answer forever,” said Stefan Walter, chief executive officer of Finma, in an interview in Zurich. 

Walter signaled the lender shouldn’t expect any leniency on the core plank of the reforms — 100% capital backing for foreign units. That could drive up UBS’s capital requirements by as much as $25 billion, with executives warning that such a steep increase would hurt competitiveness and put investor payouts at risk.

Speaking at a conference on Wednesday morning, UBS Chief Executive Officer Sergio Ermotti responded to Walter’s comments, saying that “a longer transition period doesn’t change the substance” of the regulator’s demands. 

UBS shares were down 1.1% as of 9:51 a.m. in Zurich. 

Walter, who was the secretary general of the Basel Committee on Banking Supervision when it started to hammer out the global response to the financial crisis more than a decade ago, insisted that anything short of a full deduction of foreign units from the parent bank’s capital will “introduce pro-cyclicality at a time when an institution is weak and can least afford it.”

In terms of the treatment of subsidiaries, the proposal “is on the strictest end of the spectrum,” Walter said. “But there’s no other country that has a G-SIB which is such a massive part of the economy. That’s unprecedented.” 

G-SIBs are global systemically important banks, a group that is subject to special capital levies. UBS’s 2023 takeover of Credit Suisse created a bank whose balance sheet is twice the size of Switzerland’s annual economic output.

Crisis Lessons

Legislation on the capital rules will go before Swiss lawmakers by May this year, with the earliest implementation likely only by 2028. A phase-in period could then mean impact of the new rules would be muted before the end of the decade. While Finma isn’t the ultimate decision-maker, its opinion carries some weight. Parliament will eventually vote on the capital matter, and as always in Switzerland a referendum is a possibility under some circumstances. 

“We respect that we’re in a democratic process, and you know, whatever the outcome will be the outcome,” Walter said. “But we’re clear in what our view is on the topic.”

The government last year identified insufficient capital against foreign units as a core weakness that contributed to the Credit Suisse crisis, as it essentially rendered the sale of subsidiaries abroad impossible in an emergency. 

A longer implementation time “should allow UBS to build up capital over time without meaningfully impacting capital distributions to shareholders,” said Anke Reingen and Matthew Russell, analysts at Royal Bank of Canada in a note to clients after this story was published.

Independent Regulator

Speaking to Bloomberg on a wide range of issues, Walter responded to the criticisms that Finma has faced as it adjusts its practices in the wake of Credit Suisse’s collapse. The regulator was slammed in a parliamentary report last year over its perceived inaction during the build up to the crisis. 

Walter took over in April last year, as part of the government’s efforts to revamp the institution. He continues to argue that the body needs “undisputed independence” as well as proper resources and the power to intervene early.

Finma’s more active stance since Walter’s arrival has also surprised some in Switzerland. For its part, UBS has complained that it is now paying for the mistakes of others, when it stepped in to rescue its stricken rival.

“We’re not beating up UBS,” Walter said. “We’re saying, what are the lessons coming out of the crisis, and what does that mean for how the regulation should be set going forward?”

Walter, who was previously a supervisor with the European Central Bank and the Federal Reserve Bank of New York, said the treatment UBS was receiving was “no more intense” than that experienced by other major banks. “If you want to compare this to a global standard, they’re far from being over-regulated,” he said. 

Keep At It

The regulatory tone in Switzerland is now however in contrast to other major economies, where Donald Trump’s vow to slash red tape has led to a drive toward “simplifying” financial regulation regimes. 

On Monday, UBS said in its annual report that the regulatory regime in the country was now “among the strictest of the major financial centers.”

Switzerland is out of step particularly on the final package of post crisis global bank reforms — dubbed Basel III — which the country implemented in full in January. The US and the UK have both deferred the whole package, while the EU is considering a further delay to the most internationally sensitive aspect of it, which deals with banks’ markets businesses. 

Walter said it would have been “very helpful” if other major jurisdictions had stuck to their time-frames, but that he’s also optimistic that countries including the US would ultimately implement the new rules. Finma would stay the course, he said. 

“Switzerland has moved ahead and is committed to do so,” he said. “I think that the extra resilience will serve the country very well as an open economy in a world that’s quite turbulent.” 

As he heads into his second year at the helm of Finma, Walter also said that he feels a lot of support for his tougher regulatory stance from people inside and outside of Finma, including in the government.

“It’s no secret, I’m quite vocal on a number of topics,” he said. “So I ask people, okay, is this the right balance here? And most people tell me: Keep at it.”

–With assistance from Levin Stamm.

(Updates with Ermotti comments, shares. An AI summary previously at the top of the story was removed because of an incorrect attribution)

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